United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
-------------------- --------------------
Commission file number : 0-25679
FIRST AMERICAN CAPITAL CORPORATION
----------------------------------------------------
(Exact Name of small business issuer in its charter)
Kansas 48-1187574
------------------------------- ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
1303 S.W. First American Place Topeka, Kansas 66604
------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (785) 267-7077
-----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $.10 Par Value - 4,687,078 shares as of August 1, 2003
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
Part I. FINANCIAL INFORMATION Page Numbers
------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002............................................................................ 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2003 and 2002 and for
the six months ended June 30, 2003 and 2002...................................................... 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002.......................................................... 6
Notes to Condensed Consolidated Financial Statements................................................... 8
Item 2. Management's Discussion and Analysis or Plan
of Operation.............................................................................. 11
Item 3. Controls and Procedures....................................................................... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................................ 15
Item 5. Other Information.............................................................................. 17
Item 6. Exhibits and Reports on Form 8-K............................................................... 17
SIGNATURES............................................................................................. 19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
------------- -------------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $10,752,545
in 2003 and $10,096,482 in 2002) $ 11,587,529 $ 10,760,529
Investments in real estate 274,564 274,564
Policy loans 76,506 65,011
Notes receivable (net of valuation allowance
of $2,368 in 2003 and $2,368 in 2002) 23,359 28,204
Short-term investments 90,000 416,801
------------- -------------
Total investments 12,051,958 11,545,109
Cash and cash equivalents 576,075 400,062
Investments in related parties 118,513 131,549
Accrued investment income 182,877 177,598
Accounts receivable 392,442 322,421
Deferred policy acquisition costs (net of accumulated
amortization of $1,904,370 in 2003 and $1,682,954 in 2002) 3,823,447 3,186,587
Property and equipment (net of accumulated depreciation
of $327,944 in 2003 and $264,976 in 2002) 2,901,519 2,952,046
Other assets 40,683 31,144
------------- -------------
Total assets $ 20,087,514 $ 18,746,516
============= =============
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
-------------- --------------
Policy and contract liabilities:
Annuity contract liabilities $ 3,874,862 $ 2,888,962
Life policy reserves 2,786,750 2,308,859
Liability for policy claims 35,766 78,671
Policyholder premium deposits 239,727 219,629
Deposits on pending policy applications 22,414 197,013
Reinsurance premiums payable 37,468 39,886
-------------- --------------
Total policy and contract liabilities 6,996,987 5,733,020
Commissions, salaries, wages and benefits payable 22,694 55,230
Other liabilities 403,671 108,075
Note payable 1,867,558 1,888,844
Federal income taxes payable:
Deferred 644,343 1,066,390
-------------- --------------
Total liabilities 9,935,253 8,851,559
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized; 5,449,578 shares
issued and 4,687,078 shares outstanding in 2003 and 2002 544,958 544,958
Additional paid in capital 12,380,523 12,380,523
Accumulated deficit (2,055,720) (2,076,839)
Accumulated other comprehensive income 667,983 431,798
Less: Treasury stock held at cost (762,500 shares in 2003 and 2002) (1,385,483) (1,385,483)
-------------- --------------
Total shareholders' equity 10,152,261 9,894,957
-------------- --------------
Total liabilities and shareholders' equity $ 20,087,514 $ 18,746,516
============== ==============
See notes to condensed consolidated financial statements.
4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Gross premium income $ 904,641 $ 790,328 $ 2,108,412 $ 1,688,666
Reinsurance premiums assumed 2,332 -- 3,070 --
Reinsurance premiums ceded (29,848) (33,434) (74,861) (67,979)
------------ ------------ ------------ ------------
Net premium income 877,125 756,894 2,036,621 1,620,687
Net investment income 143,281 137,624 287,154 279,585
Net realized gain (loss) on disposal of assets -- (16,391) 341 (16,305)
Rental income 53,856 53,481 107,712 106,963
Other income -- (72) -- 990
------------ ------------ ------------ ------------
Total revenue 1,074,262 931,536 2,431,828 1,991,920
Benefits and expenses:
Increase in policy reserves 198,406 242,261 477,891 431,394
Policyholder surrender values 13,450 10,128 29,400 37,649
Interest credited on annuities and
premium deposits 72,209 38,720 134,323 70,725
Death claims 64,387 1,074 133,470 1,074
Commissions 321,073 263,212 729,741 564,682
Policy acquisition costs deferred (386,806) (363,662) (858,277) (762,926)
Amortization of deferred policy
acquisition costs 134,807 163,828 221,417 217,070
Salaries, wages, and employee benefits 285,656 334,322 680,873 685,975
Miscellaneous taxes 59,586 11,728 69,884 19,127
Administrative fees - related party -- 23,293 -- 66,142
Other operating costs and expenses 733,764 381,946 1,148,522 724,757
------------ ------------ ------------ ------------
Total benefits and expenses 1,496,532 1,106,850 2,767,244 2,055,669
------------ ------------ ------------ ------------
Loss before income tax expense (422,270) (175,314) (335,416) (63,749)
------------ ------------ ------------ ------------
Income tax (benefit) expense (500,668) 47,329 (356,535) 157,485
------------ ------------ ------------ ------------
Net income (loss) $ 78,398 $ (222,643) $ 21,119 $ (221,234)
============ ============ ============ ============
Net income (loss) per common
share - basic and diluted $ 0.02 $ (0.04) $ 0.00 $ (0.04)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
June 30, June 30,
2003 2002
----------- ----------
OPERATING ACTIVITIES:
Net income (loss) $ 21,119 $ (221,234)
Adjustments to reconcile net loss to net cash
used in operating activities:
Interest credited on annuities and premium deposits 72,977 70,725
Net realized investment (gain) loss (341) 16,305
Provision for depreciation and amortization 62,968 65,895
Equity loss in investment in affiliate 23,036 14,431
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 31,999 25,947
Interest credited to certificates of deposit balances -- (6,301)
Provision for deferred federal income taxes (356,537) 157,295
(Increase) decrease in accrued investment income (5,279) 839
Increase in accounts receivable (70,021) (127,654)
Increase in accounts receivable from affiliate -- (6,199)
Increase in deferred policy acquisition costs, net (636,860) (545,856)
Increase in policy loans (11,495) (14,254)
Increase in other assets (9,539) (34,766)
Increase in policy reserves 477,891 431,395
(Decrease) increase in liability for policy claims (42,905) 78
Decrease in deposits on pending policy applications (174,599) (11,077)
(Decrease) increase in reinsurance premiums payable (2,418) 7,079
(Decrease) increase in commissions, salaries, wages and
benefits payable (32,536) 28,160
Decrease in accounts payable to affiliate -- (7,738)
Increase in other liabilities 295,596 18,582
---------- ----------
Net cash used in operating activities $ (356,944) $ (138,348)
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (Unaudited)
June 30, June 30,
2003 2002
------------- -------------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $ (1,411,182) $ (2,236,577)
Sale or maturity of available-for-sale fixed maturities 725,000 1,517,300
Additions to property and equipment, net (12,441) (15,741)
Purchase of investments in affiliates (10,000) (9,807)
Changes in notes receivable, net 4,845 (30,000)
Short-term investments disposed, net 325,000 626,439
------------- -------------
Net cash used in investing activities (378,778) (148,386)
FINANCING ACTIVITIES:
Payments on note payable (21,286) (38,734)
Deposits on annuity contracts, net 919,963 627,896
Policyholder premium deposits, net 13,058 (1,116)
------------- -------------
Net cash provided by financing activities 911,735 588,046
------------- -------------
Increase in cash and cash equivalents 176,013 301,312
Cash and cash equivalents, beginning of period 400,062 463,363
------------- -------------
Cash and cash equivalents, end of period $ 576,075 $ 764,675
============= =============
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of First American
Capital Corporation and its Subsidiaries (the "Company") for the three month and
six month periods ended June 30, 2003 and 2002 are unaudited. However, in the
opinion of the Company, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been reflected
therein.
Certain financial information which is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but which is not required for interim reporting
purposes, has been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-KSB for the fiscal year ended December
31, 2002. Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.
2. INVESTMENTS IN RELATED PARTIES
The Company owns a 50% interest in First Computer Services, LLC ("FCS"). FCS
owns the computer hardware and software that operates a Company policy
administration, underwriting, claim processing, and accounting system. The
company uses the equity method to account for this investment, which is owned
jointly by the Company and First Alliance Corporation ("FAC") of Lexington,
Kentucky. At June 30, 2003, the carrying value of the FCS investment was
$76,713. This amount represents total capital contributions of $135,000 reduced
by the Company's $58,287 share of the cumulative net operating losses to date.
Selected financial data for FCS at June 30, 2003 and for the period ended June
30, 2003 is listed below.
Total Assets: $ 153,425
Total Liabilities: 0
Total Liabilities and Equity: 153,425
Loss from Operations: (46,073)
3. NET EARNINGS PER COMMON SHARE
Net income per common share for basic and diluted earnings per share is based
upon the weighted average number of common shares outstanding during each
period. The weighted average number of common shares outstanding was 4,687,078
for the three and six months ended June 30, 2003. The weighted average number of
common shares outstanding was 5,273,985 for the three and six months ended June
30, 2002.
4. FEDERAL INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Effective June 30, 2003, the Company commenced calculating deferred taxes based
on a consolidated income tax return approach. In conjunction therewith, the
Company reduced the tax rate used to calculate deferred taxes from 35% to 20%.
The impact of this change in accounting estimate is reflected in the current
quarter summary of operations. Income tax expense was reduced by $532,546, or
$.11 per share, for the three and six month periods ended June 30, 2003,
resulting in an income tax benefit of $500,668 for the three months ended June
30, 2003 and $356,535 for the six months ended June 30, 2003.
8
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NOTE PAYABLE
On April 22, 2003, the Company refinanced the note to Columbian Bank and Trust
Company with a note from Western National Bank. The note is secured by the home
office building. The note will mature on April 22, 2013. The note is payable in
120 monthly payments of $13,534 each with a final payment of the unpaid
principal balance and interest on April 22, 2013. Interest will be accrued at 6%
until April 22, 2008 at which time the rate may change. The interest rate change
will be the Wall Street Journal Prime Rate of Interest, subject to a floor of 6%
and a ceiling of 9.5%.
Required future principal payments are as follows:
Principal
Year Payment
---------------- ----------------
2003 $ 24,551
2004 51,400
2005 54,936
2006 58,373
2007 62,024
Thereafter 1,616,274
----------------
Total $ 1,867,558
================
6. COMPREHENSIVE INCOME
The components of comprehensive income along with the related tax effects for
the three months and six months ended June 30, 2003 and 2002 are as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Unrealized gain on available-for-sale securities:
Unrealized holding gain during the period $ 153,261 $ 239,402 $ 170,674 $ 124,070
Tax benefit (expense) 71,607 (83,791) 65,511 (43,426)
----------- ----------- ----------- -----------
Other comprehensive income $ 224,868 $ 155,611 $ 236,185 $ 80,644
=========== =========== =========== ===========
Net income (loss) $ 78,398 $ (222,643) $ 21,119 $ (221,234)
Other comprehensive income net of
tax effect:
Unrealized investment gain 224,868 155,611 236,185 80,644
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 303,266 $ (67,032) $ 257,304 $ (140,590)
=========== =========== =========== ===========
Net income (loss) per common share-basic and diluted $ 0.06 $ (0.01) $ 0.05 $ (0.03)
=========== =========== =========== ===========
9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION
The operations of the Company and its subsidiaries have been classified into two
operating segments as follows: life and annuity insurance operations and
corporate operations. Segment information for the three months and six months
ended June 30, 2003 and 2002 and as of June 30, 2003 and December 31, 2002 is as
follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Life and annuity insurance operations $ 989,969 $ 840,390 $ 2,261,153 $ 1,794,409
Corporate operations 84,293 91,146 170,675 197,511
------------ ------------ ------------ ------------
Total $ 1,074,262 $ 931,536 $ 2,431,828 $ 1,991,920
============ ============ ============ ============
Income before income taxes:
Life and annuity insurance operations $ (3,432) $ (69,932) $ 322,387 $ 206,911
Corporate operations (418,838) (105,382) (657,803) (270,660)
------------ ------------ ------------ ------------
Total $ (422,270) $ (175,314) $ (335,416) $ (63,749)
============ ============ ============ ============
Depreciation and amortization expense:
Life and annuity insurance operations $ 134,807 $ 163,828 $ 221,417 $ 217,070
Corporate operations 31,590 33,097 62,968 65,895
------------ ------------ ------------ ------------
Total $ 166,397 $ 196,925 $ 284,385 $ 282,965
============ ============ ============ ============
Segment asset information as of June 30, 2003 and December 31, 2002:
June 30, December 31,
2003 2002
------------- -------------
Assets:
Life and annuity insurance operations $ 13,905,014 $ 12,090,507
Corporate operations 6,182,500 6,656,009
------------- -------------
Total $ 20,087,514 $ 18,746,516
============= =============
8. SUBSEQUENT EVENTS
On August 8, 2003, the Company settled a claim that it had breached various
marketing agreements with AF&L, Inc.("AF&L"), a long-term care insurance
company, and certain of its affiliates through the payment to AF&L of $150,000
plus $15,000 in attorney fees. The AF&L initially claimed that its damages were
approximately $560,000. The Company denies any liability in connection with the
claim.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in this report, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements. Any projections of financial performances or statements concerning
expectations as to future developments should not be construed in any manner as
a guarantee that such results or developments will, in fact, occur. There can be
no assurance that any forward-looking statement will be realized or that actual
results will not be significantly different from that set forth in such
forward-looking statement. In addition to the risks and uncertainties of
ordinary business operations, the forward-looking statements of the Company
referred to above are also subject to risks and uncertainties.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Financial Condition
Significant changes in the condensed consolidated balance sheets from December
31, 2002 to June 30, 2003 are highlighted below.
Total assets increased from $18,746,516 at December 31, 2002 to $20,087,514 at
June 30, 2003. The Company's available-for-sale fixed maturities had a fair
value of $11,587,529 and $10,760,529 at June 30, 2003 and December 31, 2002,
respectively. This investment portfolio is reported at market value with
unrealized gains and losses, net of applicable deferred taxes, reflected as a
separate component in Shareholders' Equity.
Short-term investments decreased from $416,801 at December 31, 2002 to $90,000
at June 30, 2003. The reduction of short-term investments held by the Company is
attributable to bonds maturing during the six months ended June 30, 2003, and
the proceeds being used to purchase available-for-sale securities. This resulted
in a $326,801 or 78% decrease in short-term investments.
Cash and cash equivalents increased $176,013 from $400,062 at December 31, 2002
to $576,075 at June 30, 2003. Refer to the statement of cash flows for sources
and uses of cash.
Accounts receivable increased 22% from $322,421 at December 31, 2002 to $392,442
at June 30, 2003. The increase is due to a $29,183 increase in amounts due from
agents, a $59,159 increase in due premiums, and a $18,321 decrease in other
receivables. These amounts are expected to be fully recoverable.
Deferred policy acquisition costs, net of amortization, increased 20% from
$3,186,587 at December 31, 2002 to $3,823,447 at June 30, 2003 resulting from
the capitalization of acquisition expenses related to the increasing sales of
life insurance. These acquisition expenses include commissions and other fees
incurred in the first policy year.
Liabilities increased to $9,935,253 at June 30, 2003 from $8,851,559 at December
31, 2002. A significant portion of this increase is due to life insurance
related policy liabilities. Policy reserves established due to the sale of life
insurance increased $477,891 or 21% from December 31, 2002 to June 30, 2003.
These reserves are actuarially determined based on such factors as insured age,
life expectancy, mortality and interest assumptions. Liabilities for policy
claims are recorded based on reported death.
There was a 34% increase in the amount of $985,900 for annuity contract
liabilities from December 31, 2002 to June 30, 2003. According to the design of
FLAC's primary life insurance product, first year premium payments are allocated
100% to life insurance and renewal payments are split 50% to life and 50% to
annuity. In the first six months of 2003, annuity contract liabilities increased
as additional policies reached the second policy year.
11
Deposits on pending policy applications decreased from $197,013 at December 31,
2002 to $22,414 at June 30, 2003 because of the timing issues associated with
receipt and application of premium payments.
There was a decrease of $32,536 in commissions, salaries, wages and benefits
payable from the December 31, 2002 balance of $55,230 to the June 30, 2003
balance of $22,694. The decrease is attributable to a decrease in the number of
employees and the timing factors associated with payroll and commission run
dates.
Other liabilities increased $295,596 from $108,075 at December 31, 2002 to
$403,671 at June 30, 2003. The increase in other liabilities is primarily
attributable to a pending legal settlement to AF&L, Inc. in the amount of
$165,000. Additionally, there was an increase of $108,794 in accounts payable.
The increase results from the timing of the receipt of significant invoices for
legal and annual meeting expenses. The significance of the invoices is directly
related to the Company's proxy contest and litigation surrounding such contest.
Federal income taxes payable have decreased 40% from $1,066,390 at December 31,
2002 to $644,343 at June 30, 2003. Federal income taxes payable represent
deferred taxes established based on timing differences between income recognized
for financial statement purposes and taxable income for the Internal Revenue
Service. These deferred taxes are based on the operations of the Company and on
unrealized gains of fixed maturities. The decrease in deferred income taxes
payable is primarily attributable to the reduction in the tax rate used to
calculate deferred taxes under a consolidated tax return approach from 35% to
20%.
Results of Operations
Revenues for the six months ended June 30, 2003 totaled $2,431,828 as compared
to $1,991,920 for the same period of 2002. The increase is primarily due to a
26% increase in net premium income of $415,934 resulting from the growth in the
policyholder base. The increase in net premium income has been driven by
increased sales of the Company's Final Expense product and renewal year premiums
collected on the Company's FA2000 product. First year premiums collected on the
FA2000 product have decreased from prior year as a result of the disruptive
affect of the Company's 2003 proxy contest on its customers, shareholders and
its marketing agents used to market the Company's FA2000 product.
Revenues for the three months ended June 30, 2003 totaled $1,074,262 as compared
to $931,536 for the same period of 2002. The increase is primarily due to a 16%
increase in net premium income of $120,231 resulting from the growth in the
policyholder base. The increase in net premium income has been driven by
increased sales of the Company's Final Expense product and renewal year premiums
collected on the Company's FA2000 product. First year premiums collected on the
FA2000 product have decreased from prior year as a result of the disruptive
affect of the Company's 2003 proxy contest on its customers, shareholders and
its marketing agents used to market the Company's FA2000 product.
Benefits and expenses totaled $2,767,244 and $2,055,669 for the six months ended
June 30, 2003 and 2002, respectively. In total, benefits and expenses increased
$711,575, or 35%. Other operating costs accounted for $423,765 of the total
increase resulting from significant increases in legal fees ($194,273), annual
meeting expense ($128,869), audit fees ($27,126) and board fees ($26,425). The
increases in legal fees, annual meeting expense and board fees are directly
related to the Company's 2003 proxy contest and the litigation surrounding such
contest. See "Submission of Matters to a Vote of the Security Holders." The
increase in audit fees is a result of additional work being required due to the
growth of the Company and the audit now being performed on a stand-alone basis.
The increase in other operating costs is also attributable to $165,000 in legal
settlement fees due to AF&L. See "Other Information." These increases were
offset by decreases in agency related expenses ($78,044) and travel, meals and
entertainment expenses ($30,070). The decreases in agency related expenses and
travel, meals and entertainment expenses are the result of management
implementing tighter control of these expense areas during the current quarter.
As a result of the growth in the policyholder base, the increase in policy
reserves was $46,497 greater than the same period in 2002. Commissions increased
$165,059 due to the increase in premium income and increased sales of the Final
Expense product. Commission rates paid on first year premiums received on the
Final Expense product are typically higher than those paid on the other products
being
12
marketed by FLAC. Administration fees decreased $66,142 when compared to the
same period in 2002 due to the termination of the management agreement with
First Alliance Corporation. Death claims for the six months ended June 30, 2003
totaled $133,470 as compared to $1,074 at June 30, 2002. The increase is due to
the maturation of policies. Interest credited on annuities and premium deposits
increased $63,598 for the six months ended June 30, 2003 compared to June 30,
2002. The increase is due to the design of FLAC's primary life insurance product
whereby first year premium payments are allocated 100% to life insurance and
renewal payments are split 50% to life and 50% to annuity. In the first six
months of 2003, interest credited on annuities increased as additional policies
reached the second policy year.
Benefits and expenses totaled $1,496,532 and $1,106,850 for the three months
ended June 30, 2003 and 2002, respectively. In total, benefits and expenses
increased $389,682, or 20%. Other operating costs accounted for $351,818 of the
total increase resulting from significant increases in legal fees ($157,961) and
annual meeting expense ($128,869). The increases in legal fees and annual
meeting expense are directly related to the Company's 2003 proxy contest and the
litigation surrounding such contest. The increase in other operating costs is
also attributable to $165,000 in legal settlement fees due to AF&L. These
increases were offset by decreases in agency related expenses ($57,172) and
travel, meals and entertainment expenses ($26,890). The decreases in agency
related expenses and travel, meals and entertainment expenses are the result of
management implementing tighter control of these expense areas during the
current quarter. The increase in policy reserves was $43,855 less than the same
period in 2002. Salaries and wages decreased $48,666 as a result of a decrease
in the number of employees. Commissions increased $57,861 due to the increase in
premium income and increased sales of the Final Expense product. Commission
rates paid on first year premiums received on the Final Expense product are
typically higher than those paid on the other products being marketed by FLAC.
Administration fees decreased $23,293 when compared to the same period in 2002
due to the termination of the management agreement with First Alliance
Corporation. Death claims for the three months ended June 30, 2003 totaled
$64,387 as compared to $1,074 at June 30, 2002. The increase is due to the
maturation of policies. Interest credited on annuities and premium deposits
increased $33,489 for the three months ended June 30, 2003 compared to June 30,
2002. The increase is due to the design of FLAC's primary life insurance product
whereby first year premium payments are allocated 100% to life insurance and
renewal payments are split 50% to life and 50% to annuity.
Liquidity and Capital Resources
During the quarters ended June 30, 2003 and 2002, the Company maintained liquid
assets sufficient to meet operating demands, while continuing to utilize excess
liquidity for fixed maturity investments. Net cash used in operating activities
during the six months ended June 30, 2003 and 2002 totaled $356,944 and
$138,348, respectively. The increase in net cash used in operating activities
during the six months ended June 30, 2003 is directly related to the Company's
2003 proxy contest and the litigation surrounding such contest.
FLAC's insurance operations generally receive adequate cash flows from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. Cash collected from deposits on annuity contracts and policyholder
premium deposits are recorded as cash flows from financing activities. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
The Company's former president has made a demand on the Company for the payment
of $250,000 in severance benefits under his employment agreement. The Company
denies the allegation. If this claim is found to be meritorious, the Company's
liquidity could be adversely affected.
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ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the design and effectiveness of our disclosure controls and procedures as
of the end of the period covered by this report (the "Evaluation Date"),
have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequately designed and operating effectively to
ensure that material information relating to us would be made known to
them by others within the Company, particularly during the period in
which this Form 10-QSB Quarterly Report was being prepared.
Changes in Internal Controls
There were no significant changes in our internal controls over
financial reporting that has materially affected or is reasonably
likely to materially affect internal control over financial reporting
subsequent to the date of the most recent evaluation, nor any
significant deficiencies or material weaknesses in such internal
controls over financial reporting requiring corrective actions.
As a result, no corrective actions were taken.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company recently settled litigation arising from the
proxy contest for the election of directors at the Company's 2003 annual
meeting.
On May 30, 2003, Rickie D. Meyer and Michael M. Fink, shareholders, directors
and former officers of the Company, initiated a lawsuit in the District Court of
Shawnee County, Kansas (the "District Court") seeking a declaratory judgment
determining that the Company was then engaging in conduct which violated and
interfered with the voting rights of the Company's shareholders in connection
with the Company's 2003 annual meeting. The action sought a temporary
restraining order, temporary injunction and a permanent injunction restraining
the Company from holding its June 2, 2003 annual meeting of shareholders pending
a final disposition of a regulatory application filed by Harold E. Riley, Mark
A. Oliver and Citizens, Inc. ("Citizens") with the Kansas Insurance Department
(the "Department") for permission to change the control of the Company.
Initiation of the lawsuit by Fink and Meyer followed a May 23, 2003
determination by the Department that voting of the proxy cards solicited by the
First American Committee for the Protection of Shareholder Value (the
"Committee"), a group formed by Meyer, Fink and others to nominate and elect an
alternate slate of directors, would violate the Kansas Insurance Holding
Companies Act.
On May 31, 2003, the District Court issued a temporary restraining order (the
"Restraining Order") permitting the Company to hold its annual meeting of
shareholders on June 2, 2003, as scheduled, but prohibiting the Company from
certifying any final results of the election of the board of directors at the
meeting or seating any new members of the board until further order of the
District Court. In the Restraining Order, the District Court directed Meyer and
Fink to deliver to the District Court (and not the annual meeting) any proxies
which they claimed should be eligible to be voted and counted at the annual
meeting, including the white proxy cards solicited by the Committee, to be held
by the District Court until their validity under Kansas insurance laws could be
determined.
The Company subsequently responded by filing its answer in the action generally
denying Meyer's and Fink's allegations and asserting certain counterclaims
against these individuals.
The settlement of the litigation was part of a global settlement contained in a
settlement agreement dated August 8, 2003 (the "Agreement") among the Company,
the Committee, Citizens, Riley, Oliver, Fink and Meyer. Under the settlement,
Fink and Meyer agreed to dismiss the lawsuit and to dissolve the Restraining
Order. Citizens, Riley and Oliver agreed, as part of the settlement, to withdraw
the pending application seeking the Department's approval to a change of control
of the Company. Other material terms of the Agreement include: (i) the Company's
agreement to dismiss its counterclaims in the lawsuit; (ii) the Committee
members' agreement to dissolve the Committee; (iii) Citizens' agreement not to
acquire, directly or indirectly, any securities of the Company for a period of
two years; (iv) Riley's and Oliver's agreements to revoke the irrevocable
proxies granted to them by Fink, Meyer and others; and (v) the parties' release
of certain claims against the others. On August 8, 2003, the lawsuit was
dismissed and the Restraining Order was dissolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As previously reported, the Company recently announced that the slate of
nominees proposed by management of the Company to serve as directors of the
Company until its 2004 annual meeting has been certified as the winner in the
proxy contest initiated in April 2003 by a shareholder group financed by
Citizens. Certification of the final results of the June 2, 2003 election had
been delayed due to the Restraining Order. See "Legal Proceedings."
15
As a result of the Restraining Order being dissolved, the Company certified the
results of the election based upon the blue proxy cards delivered to its
election inspector prior to the Annual Meeting and the ballots voted at the
Annual Meeting. Pursuant to the certification, all management's nominees were
elected to the Board of Directors for a term of one year as follows:
Nominee Votes For Withheld
------- --------- --------
Paul E. Burke 1,890,530 44,762
Edward D. Carter 1,892,530 42,762
Thomas M. Fogt 1,892,530 42,762
Kenneth L. Frahm 1,892,530 42,762
Stephen J. Irsik, Jr. 1,892,530 42,762
John G. Montgomery 1,892,530 42,762
Harland E. Priddle 1,892,530 42,762
Gary E. Yager 1,892,530 42,762
The Committee's slate of nominees, none of whom were elected to office, received
the following votes:
Nominee Votes For Withheld
------- --------- --------
Danny N. Biggs 1,625 0
Dean F. Ferrell 1,625 0
Roger K. Viola 1,625 0
Harold E. Riley 1,625 0
Rick D. Riley 1,625 0
Mark A. Oliver 1,625 0
Rickie D. Meyer 1,600 25
Michael M. Fink 1,600 25
In addition, Kerber, Eck & Braeckel, LLP were approved as the independent
auditors of the Company for 2003 by the following vote:
For 1,881,106
Against 17,332
Abstain 36,854
The election results, as certified, do not take into account the white proxy
cards solicited by the Committee and delivered to the District Court pursuant to
the Restraining Order. However, a recent court-ordered tabulation of all ballots
and blue and white proxy cards by representatives of the Company and the
Committee demonstrates that the outcome of the election of directors would not
have changed had the white proxy cards been counted in the election.
Based upon this court-ordered tabulation, which is contained in a report filed
with the District Court, the results of the election of directors would have
been as follows had the white proxy cards been counted:
Nominee Votes For Withheld
------- --------- --------
Paul E. Burke 1,744,856 13,400
Edward D. Carter 1,744,856 13,400
Thomas M. Fogt 1,744,856 13,400
Kenneth L. Frahm 1,744,856 13,400
Stephen J. Irsik, Jr. 1,744,856 13,400
John G. Montgomery 1,744,856 13,400
Harland E. Priddle 1,744,856 13,400
Gary E. Yager 1,744,856 13,400
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Had the white proxy cards been counted, the Committee's slate would have
received the following votes:
Nominee Votes For Withheld
------- --------- --------
Danny N. Biggs 1,705,082 36,704
Dean F. Ferrell 1,708,082 33,704
Roger K. Viola 1,708,082 33,704
Harold E. Riley 1,708,082 33,704
Rick D. Riley 1,708,082 33,704
Mark A. Oliver 1,708,082 33,704
Rickie D. Meyer 1,050,857 690,929
Michael M. Fink 1,050,857 690,929
ITEM 5. OTHER INFORMATION
On August 8, 2003, the Company settled a claim that it had breached various
marketing agreements with AF&L, a long-term care insurance company, and certain
of its affiliates through the payment to AF&L of $150,000 plus $15,000 in
attorney fees. AF&L initially claimed that its damages were approximately
$560,000. The Company denies any liability in connection with the claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Index to Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of First American Capital
Corporation (Incorporated by reference from Exhibit 2.1 to the
Registrant's amended Form 10-SB filed August 13, 1999)
3.2 Amendment II To Bylaws of First American Capital Corporation
(Incorporated by reference from Exhibit 3.2 to the
Registrant's Form 10-KSB filed March 31, 2003)
4 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations, and Restrictions
Thereof of 6% Non-Cumulative, Convertible, Callable Preferred
Stock (Incorporated by reference from Exhibit 3 to the
Registrant's amended Form 10-SB filed August 13, 1999)
10.1 Form of Advisory Board Contract (Incorporated by reference
from Exhibit 6.2 to the Registrant's amended Form 10-SB filed
August 13, 1999)
10.2 Service Agreement effective January 1, 2002 between First
American Capital Corporation and First Life America
Corporation (Incorporated by reference from Exhibit 10.3 to
the Registrant's Form 10-KSB filed March 31, 2003)
10.3 Operating Agreement of First Computer Services, LLC dated
December 1, 2001 (Incorporated by reference from Exhibit 10.10
to the Registrant's Form 10-KSB filed March 31, 2003)
10.4 Automatic Umbrella and Bulk ADB Reinsurance Agreements
effective September 1, 1998 between First Life America
Corporation and Business Men's Assurance Company of America
(Incorporated by reference from Exhibit 6.8 to the
Registrant's Form 10-SB filed August 13, 1999)
21 Subsidiaries of First American Capital Corporation
(Incorporated by reference from Exhibit 21 to the Registrant's
Form 10-KSB filed March 31, 2003)
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31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (*)
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (*)
32.1 Certificate of Chief Executive Officer pursuant to Section 18
U.S.C. Section 1350 (*)
32.2 Certificate of Chief Financial Officer pursuant to Section 18
U.S.C. Section 1350 (*)
(*) Filed herewith
b) Reports on Form 8-K
During the quarter ended June 30, 2003 the Company filed a
current report on Form 8-K dated June 17, 2003 disclosing the
mailing of a letter to its shareholders regarding the status
of its contested board of directors election. Following the
end of the quarter, the Company filed a current report on Form
8-K dated August 12, 2003 disclosing its issuance of a press
release announcing the results of the shareholder's election
of directors and the settlement of its proxy contest.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST AMERICAN CAPITAL CORPORATION
Date: 8/19/03 By: /s/ Vincent L. Rocereto
------------------- -----------------------------------------------------
Vincent L. Rocereto
President and Chief Executive Officer
Date: 8/19/03 By: /s/ Harland E. Priddle
-------------------- -----------------------------------------------------
Harland E. Priddle
Secretary, Treasurer & Chief Financial Officer
19